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auction, Auction Law, auctioneer, auctioneers, auctions, buyer's premium, Christie's, Sotheby's, surcharge
Since Christie’s and Sotheby’s introduced the buyer’s premium in 1975 in England, and soon after (1977) in the United States, the buyer’s premium has been part of the auctioneering landscape in the United States.
We wrote about the buyer’s premium some time ago. We also wrote about the net effect of the buyer’s premium discussing how buyers consider (or don’t consider) the buyer’s premium, and how that effects the seller’s and auctioneer’s position.
Our topic today addresses a common misconception that the “buyer’s premium doesn’t matter …” In other words, bidders and buyers ignore it, and bid without regard to it.
We begin with a premise: If it doesn’t matter, then why aren’t auctioneers charging a 30% buyer’s premium? 40%? 50%? Why not charge a 2,000% buyer’s premium?
Christie’s and Sotheby’s both recently increased their buyer’s premium to 25% on the first $75,000 (and $100,000) sale prices. Why didn’t they raise it to 35%? Why not 45%? The answers to these questions — essentially “Why not higher buyer’s premiums?” — is that it apparently does matter.
Maybe the right answer regards what bidders “are mindful of” versus what they “aren’t mindful of” … if bidders would bid without thinking that there is a 10% up-charge on their purchase (a 10% buyer’s premium) then the auctioneer is wise to charge it. If bidders would bid without thinking that there is a 20% … in other words, it’s wise to charge the most buyer’s premium that bidders would not be mindful of?
Around my home region in the spring people run around in shorts and short sleeve shirts when it gets up to 55° and have a jacket and sweater on the fall when it gets down to 55°. Depends on what you’re used to I suppose? Is a 10% buyer’s premium a non-issue if you’re expecting (or are used to) a 15% buyer’s premium?
The other issue is the magnitude of the total hammer price. Countless real estate auctioneers have been selling such with a 10% buyer’s premium and see people with calculators in hand while bidding — figuring their total contract price. A 10% buyer’s premium doesn’t matter on a $150,000 purchase? On a $1,500,000 purchase? More than likely it does …
Lastly, how do we know otherwise that bidders are disregarding the buyer’s premium — in other words, it “doesn’t matter?” Many auctioneers say that their bidders are bidding just the same that they did prior to implementing the buyer’s premium, but how do they know that? Would that bidder have bid more without the buyer’s premium in place? Maybe not … but where’s the proof?
In my experiences in talking to 1,000’s of auctioneers across the country, I hear some say that buyers seem surprised by their total purchase price (suggesting they were not mindful of the buyer’s premium) and I hear some say that buyers stop bidding sooner, or acknowledge the buyer’s premium (suggesting they are mindful of the buyer’s premium.)
If you are an auctioneer who says, “bidders never figure in the buyer’s premium — it’s a non-issue,” then we propose you to raise your percentage — why not?
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.
Mike Brandly, Auctioneer Blog 
I don’t think this issue can be answered the same regardless of what you’re selling and your local market. In our market, a 10% “Buyer’s Premium” definitely would matter selling large expensive farm equipment, because buyer’s could probably buy the same model piece of equipment a the local dealer for the same price with better terms – such as 30 day warranty, financing, etc. However in our market, a 10% “Buyer’s Premium” probably doesn’t have much affect on a household estate auction. Even though all auctions, have their similarities, they usually need to be “custom fitted” to the sellers needs. Sometimes a “Buyer’s Premium” fits those needs best and sometimes maybe not.
Auctioneers who use a buyer premium hurt the bottom line of auctioneers who don’t. Say you bid a sale at 20% and another auctioneer bids same sale at 15% but charges a 10% buyers Premium which he Recieves. Your Client that is serching for price no matter what looks at the lower cost to them which in return first auctioneer looses sale. That Does Matter!
When I first established my business is was mainly a weekly consignment auction. I barely kept my head above water untilI I initiated a buyers premium. That 10% paid the bills and left me something to eat on.
If the bids are lower because of the BP, the person on the short end is really the consignor.
And I’ve never heard a consignor complain about the buyer having to pay a premium.
Thanks Ed.
In my blog https://mikebrandlyauctioneer.wordpress.com/2011/04/02/the-net-effect-of-the-buyers-premium/ the effects are as follows:
If bidders disregard the buyer’s premium when bidding, the same buyer’s premium nets the seller and auctioneer more.
If bidders correctly calculate the effect of the buyer’s premium, the seller nets a bit more, and the auctioneer earns a bit less.
If bidders miscalculate the effect of the buyer’s premium, the seller nets about the same, and the auctioneer earns less.
[If bidders correctly calculate the effect of the buyer’s premium, the seller nets a bit more, and the auctioneer earns a bit less]
If I sell an item for $100.00 at 20% commission I take home $20 and the seller takes home $80
If I charge a 10% buyers premium and the item sells for $90 because the seller figures in the BP , I take home $27 and the seller takes home $72.
Am I missing something?
This analysis is based upon charging the same BP as seller commission, and comparing all seller commission versus all buyer premium — one or the other.
Yes, if you charge seller commission AND a buyer’s premium, you make more.
The precise math is $90.91 bid price + 10% = $100. so, if a bidder correctly calculated, he would more likely bid $91.
I know I’m in the sticks but I wasn’t aware that anyone charged a buyers premium instead of a commission. What type of auctions do that? And yes my math was intentionally off as I don’t offer one dollar increments at my auction.:)
I reread my reply and perhaps it came off as facetious but that was not the intention. I am truly curious. Is there a type of auction that generally only charges a buyers premium?
All good Ed. Many real estate auctions charge only a 10% BP for example, advertising to sellers, “we’ll sell your house for free!”
Now I’m seeing several across the country doing the same on personal property consignment auctions. One the other day was, “Bring your items — 0% commission!” where the BP was the auctioneer’s only profit.
Yes I heard of 0% commission with buyers premium but what is not said until you bring items out to sell, is the 3 or 5 dollar entry fee on each item sold….the bottom line of charging only 10% BP to me means someone needs the sale and will do anything to get it because they cannot rely on their own professionall ablitity (to charge commission).
Just one wayto get sales over auctioneers who do not charge a buyers premium.
From reading these comments, one can say that there is one benefit of the introduction of the buyer’s premium. It gives us all more options in doing business.
It allows us to be inovative in the ability to sell our services. And that is a good thing.
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